Central Bank absorbs record sum of pesos

Even though the Central Bank put a stop to the increases in interest rates of recent weeks, the monetary authority’s efforts to vacuum up excess currency in the financial system was met with record demand.

The Central Bank snapped up 11.274 billion pesos for its LEBAC and NOBAC notes, accumulating a 29.522-billion-peso monetary contraction so far this year.

There was a record amount of demand for the peso-denominated notes with 16.12 billion pesos, and the bank ultimately allocated 15.107 billion pesos, while all offers for dollar notes of US$131 million were snapped up. No such amounts had been achieved since 2002 when the Central Bank first began its weekly notes auction.

After increasing interest rates by more than 900 basic points in two weeks, all rates were left yesterday at similar levels than last week. Interest rates for 84- and 98-day notes in pesos reached 28.7 percent and 28.8 percent, respectively, while rates for 140-and 196-day notes reached 29.2 and 29.5 percent, respectively. Long-term notes — of 280, 343 and 392 days — reached an average interest rate of 30 percent.

At the same time, the Central Bank issued one-month to one-year dollar notes on rates that are between 2.5 and four percent.

The steady increase of interest rates was part of the Central Bank’s efforts to get cash out of circulation and present attractive options to encourage residents to stop hoarding cash. Last week, there was a record amount of demand for the peso-denominated notes with 14.926 billion pesos but the bank ultimately allocated just 11.391 billion pesos, while all offers for dollar notes of US$187 million were snapped up.

Nevertheless, no direct effects were seen on rates of fixed income deposits. The Badlar rate (the reference for deposits of more than one million pesos) has remained flat at 25.5 percent, as have rates at private banks which have not exceeded the 23 percent.

Economists told the Herald the trend could change over the next couple of weeks, which would explain why the Central Bank decided to pause the increase to measure the effects.

“The Central Bank wants to wait and see the effects that the last two weeks of increases will have on the market,” Luz García Balcarce, economist at Ecolatina agency, told the Herald. “The interest rates on fixed-income deposits have not been increasing at the same rate as the Central Bank notes but that’s going to change in the coming weeks.”

Even though they left open the door for future increases, economists largely see another boost in interest rates as something that is, after the drop in the official and illegal dollar exchange rates, a consequence of the Central Bank’s new regulation that restricts the amount of foreign currency holdings banks can keep in their coffers.

“The Central Bank thinks it has put a stop to any possible increases in the dollar exchange rate and has calmed future expectations,” Fausto Spotorno, director of the Economic Studies Centre at the Orlando Ferreres consultancy, told the Herald. “Since the exchange rate of the future dollar has also dropped, it will be soon more convenient to choose fixed-income deposits as an investment option rather than buying dollars.”

Fixed-income deposits in pesos compete as an investment option with the new scheme to buy dollars legally, authorized by the federal government two weeks ago, and with the illegal dollar market. Residents who have incomes that are higher than 7,200 pesos per month can now buy dollars for savings for a maximum US$2,000 per month.

A survey carried out by Bloomberg News estimated the government needs to offer 37.5 percent interest to attract enough investors to halt the loss of pesos. Bank of America says a rate of 40 percent is needed to effectively compensate for consumer prices rising an estimated 28 percent annually.

“There might be another increase in interest rates soon but not as significant as the last two weeks,” Soledad Pérez Duhalde, coordinator of macroeconomic analysis at Abeceb consultancy, told the Herald. “Now the Central Bank has to wait and see if it has fulfilled the market’s devaluation and rate increment expectations.”

Negative effects

The stop on the increase in interest rates can also be explained by the negative effect the Central Bank’s decision had on loans and consumption. Banks have increased interest rates for loans between three and 11 percentage points, which are also of a shorter duration, leading to a drop in consumption as a direct consequence.

“Raising the interest rate limits the financing options small and medium-sized companies have and affects the level of consumption,” Mariano Kestelboim, an economist, told the Herald. “Another increase in the rates would have an even deeper negative impact on the economy.”

Private banks are now charging an average 44-percent annual rate for personal loans, a figure that reaches a total financial cost of 65 percent once all commissions and administrative expenses are included.

On the other hand, public banks charge a rate that is between 32 and 44 percent and can reach as high as 55 percent when all financial costs are added.

Another consequence of the increase in interest rates was felt on installment payments, one of the cornerstones of consumption that has marked the last decade. Stores have now stopped offering — or were in the last days of offering — 12-month interest free options to purchase goods.